Nickel Analysis and Forecast Q2 2013

Each Quarter FastMarkets and Sucden produce an analysis and forecast report for the Nickel market, analysis on changes to nickel prices in the global markets and forecasting for the next quarter which subscribers to FastMarkets Professional receive soon after it is published. To read the full report covering gold, platinum, palladium and base metals click here, or to download the nickel only report click here

Introduction

Nickel prices have been under significant downward pressure as the market is suffering from weak demand, abundant supply, high stocks and investment sentiment is negative towards the outlook – even at these already low prices.

The recovery in China has been slower than generally expected and as a result, restocking has been limited and the lack of nickel production cutbacks has meant the path of least resistance for prices and sentiment has been to the downside.

From these low price levels, the outlook is brighter, as although new low-cost production is coming on stream, it is likely to force other higher cost producers out of the market. In addition, with an estimated 22 percent of nickel supply now coming from nickel pig iron (NPI) and with 60% of the nickel ore feeding the NPI production coming from Indonesia, the ban of ore exports from Indonesia that starts in 2014, could potentially disrupt NPI supply significantly, even if only for a limited time – this is something we feel the market will start to take on board in the second half of the year.

Current Situation

The nickel market is weak from a supply perspective as the production taps have not been turned off to any great extent, even though prices have weakened. There have been some supply cutbacks and there are still ongoing start-up issues at some of the technologically challenging high-pressure acid-leach (HPAL) operations, but these have been more than offset by the surge in new NPI production capacity in China that is utilising low-cost Rotary-Kiln Electric Furnace (RKEF) technology. Although demand appears to be sluggish and consumers seem in no hurry to restock, actual demand is firm with solid growth being seen in stainless steel production, albeit regionalised, and with good demand from the non-stainless steel users of nickel. As such, we feel the current situation has discounted the oversupply situation and the outlook is brighter, albeit down the road.

Summary of Outlook for 2013

Nickel prices are looking oversold, prices are deep into the marginal cost curve and that is likely to force more production cutbacks. Stocks are also high, highlighting the supply surplus. Demand is robust, but there is unlikely to be any shortage of metal. We would expect prices to trade sideways at a higher level as we expect production cutbacks to improve the fundamentals.

Supply Outlook

The supply side of the nickel market has been hit by a double whammy in that the ultra-strong prices in the second half of the 2000s that took nickel prices above $50,000 per tonne, prompted significant investment in new nickel production. This new production included traditional methods that use sulphite and laterite ores, but the high nickel price also meant that China needed to find another long-term supply source for nickel and they found that in utilising the nickel units in pig iron. This source of nickel has grown rapidly from around 5,000 tonnes in the mid-2000s to an estimated 350,000 tonnes last year. So from providing virtually no nickel units seven years ago, NPI accounted for some 20 percent of the world’s nickel units last year.

Originally the outlook for NPI was limited – it provided a much needed source of supply when traditional production methods were failing to provide enough nickel and it thereby popped the 2007 nickel price bubble. But because its cost of production was deemed to be high, the market thought it would only act as a swing factor of production. China has, however, invested heavily to reduce NPI production costs and the new RKEF costs are believed to be around $15,000 per tonne, down from original NPI production costs of around $24,000 per tonne when produced in blast furnaces.

Some 300,000 tonnes of new RKEF capacity is thought to have been built in the past year, which is a significant amount of new capacity in a 1.8 million tonne market. Needless to say it has put many of the older high-cost NPI producers out of business. But, the fact that new RKEFs can operate at these low prices is also forcing some of the higher cost, more traditional, producers to cut output, as seen by the suspension of mining at the Hitura Nickel Mine in Finland and the Lake Johnson mine in Australia, with others also under threat of closure, or lowering output as they are loss-making at these prices.

The net result of all this investment is that nickel supply increased from around 1.38 million tonnes in 2008, to 1.77 million tonnes last year, a 28 percent increase in the past four years. In the absence of more significant production cutbacks, output is expected to reach 1.84 million tonnes this year as NPI production expands and as new production capacity is ramped up at the likes of Vale New Caledonia and Koniambo.

The extent to which the rapid growth in NPI has affected the market can been seen by the sharp run up in LME nickel stocks and the type and brands of nickel that make up the stock. For example there are some 57,000 tonne of nickel briquettes stored in LME warehouses in Johor. These are normally a premium product that would not be delivered into the market of last resort, as the LME is seen, if you can normally sell your production at LME plus a premium.

Overall while there is abundant supply, much of which cannot be delivered against LME contracts, such as ferronickel and NPI, and therefore cannot be held off market and financed via LME pricing, as has happened in other metals, nickel prices look set to be priced around the marginal cost curve.

The marginal cost curve may, however, be about to rise now that a considerable amount of nickel supply comes from NPI and with the new RKEF relying on the type of nickel ores exported from Indonesia, the Indonesian plan to ban the export of nickel ores in 2014 could well disrupt supply. Although an outright ban is planned, we would be surprised if it was implemented, as that would have social-economic consequences in Indonesia. But what might happen is a more stringent export policy and tariff may be implemented, which would raise the export price of nickel ores, which would in turn raise the marginal cost curve.

We also expect these low nickel prices will lead to more production cutbacks that will in turn help reduce the supply surplus.

Demand Outlook

As already mentioned, nickel demand is holding up well. Last year demand grew around 4.5 percent, which given the economic climate was good. It looks set to recover further this year as stainless steel production rose around six percent in the first quarter 2013, compared with the same period in 2012 and first quarter 2013 production, compared with the fourth quarter last year was up around 3.7 percent, according to data from the International Stainless Steel Forum (ISSF). Although these growth rates do not seem too weak given the economic climate, they are fairly tame for stainless steel, which is traditionally a strong growth market.

On closer inspection of the stainless steel production data, all the growth has come from China, see chart. First quarter production has been falling since 2011 in each region, except China. This highlights a combination of economic hardship and destocking in the various regions. Chinese production growth has been strong, but that is thought to be more to do with new capacity coming on stream, rather that strong demand per se.

Non-stainless steel nickel demand is doing well as the aerospace industry is buoyant globally (see aluminium section), and the auto industry is seeing stronger growth in the US and China.

What has been absent, however, is restocking. Globally the stainless steel industry seems in no hurry to restock and given the ample supply and good availability of nickel this is not surprising. That said, the combination of having destocked and these low prices, with the prospects for either production cutbacks, or higher marginal production costs down the road, should mean that the next shift in consumer activity is to move from destocking to hand-to-mouth buying. This will boost apparent demand and if that gives prices a lift then restocking might follow. Generally, when restocking starts in nickel it soon catches on and that can lead to some fast rebounds in nickel prices.

Chinese Trade

Chinese nickel trade (thousand tonnes)

2010

2011

2012

Jan-May 2012

Jan-May 2013

Change

Exports

Refined nickel/alloy

55.2

35

36

15

16

+7%

Imports

Refined nickel

182.9

217

160

62

75

+21%

Nickel concentrates

25,007

48,256

65,000

21,154

25,633

+21%

Source: Official customs statistics

China’s net imports of nickel totalled 59,000 tonnes in the first five months of the year, which was up 26 percent compared with the same period in 2012. Given the rapid rise in NPI capacity in China this seems somewhat surprising. Concentrate imports are up 21 percent in the same period, which is unsurprising as we would expect traders and NPI producers to be stockpiling nickel ores ahead of the planned Indonesian ban on nickel ore exports. Looking forward, we would expect refined nickel imports to remain strong, especially if low nickel prices force more cutbacks at higher cost NPI producers. In addition, if the SRB is in the process of buying nickel, with some reports suggesting they could buy up to 60,000 tonnes, then that might well lead to a pick-up in imports too.

Stocks

LME nickel stocks are at record highs, at the end of June stocks stood at 187,716 tonnes, up from 141,690 tonnes at the end of 2012, which is an increase of 32 percent. As the chart shows, LME stocks as a percentage of consumption have been higher, as was seen during the late stages of the 1991-1994 recession, but now at 11.8 percent of consumption there is a considerable overhang of metal inventory. What is more, cancelled warrants as a percentage of LME stocks are relatively low at 14.5 percent, compared with an average of 49 percent across the other base metals. This suggests that warehouse exit queues for nickel are not much of an issue, especially as special load-out rules apply to nickel and tin. Given the combination of low nickel prices, high LME stocks, good availability and widespread nickel stocks across all regions, it means that the market is well supplied.

Balance

Given so much of nickel supply now comes from non-LME deliverable nickel units, in the form of NPI and ferro-nickel, which trade at a discount to LME nickel prices, it is not surprising that LME stocks are high as we would expect users to use cheaper sub-LME grade nickel where possible, with producers of Grade I nickel then having to go to the market of last resort – the LME. As such, LME nickel stocks and NPI port stocks are seen as reflecting the surplus in the market. The International Nickel Study Group (INSG) expects another large surplus of 90,000 tonnes this year. With LME stocks up around 50,000 tonnes since the start of the year, a significant surplus does seem likely, but we would be surprised if these low prices did not force producer restraint in the second half and as such we would not be surprised if LME stocks start to decline.

Global supply/demand balance in refined nickel (thousand tonnes)

2008

2009

2010

2011

2012 (e)

2013 (f)

Production

1,378

1,330

1,440

1,640

1,750

1,825

Consumption

1,278

1,241

1,480

1,625

1,700

1,775

Balance

+100

+88

-40

+15

+50

+50

Price

$21,074

$14,272

$21,809

$22,853

$17,535

$15,565

Sources: INSG, FastMarkets forecasts

Conclusion

The nickel market is oversupplied and producers, especially NPI producers, are likely to be able to respond quickly should demand pick-up. Demand is relatively robust and it should benefit from low stainless steel prices, but conversely stainless steel demand may soften if QE tapering negatively impacts emerging market growth. On balance, we feel prices should generally be supported around the $13,500/tonne level, indeed they may have already overshot on the downside as we would not be surprised if a lot of NPI producers have already quietly idled production, which will show up in less supply in the months ahead. As such, we would look for a trading range with support at $13,000/tonne and resistance around $15,500/tonne. Movements outside this range, especially on the downside are likely to turn into spikes. In the first half of the year nickel cash prices averaged $16,130 – we would now look for an average price in the second half of $15,000, given an average price for the year of $15,565.

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